Drivers of Opportunities
Dynamic demographic and urbanization changes, analyzed in Chapter 2, indicate that some countries in the region have reached an advanced stage of transformation, whereas others are at early stages. The key markets of Mexico and Brazil are in the middle of this transformation and will slow down rather quickly and reach an advanced stage. Clearly, these changes create great opportunities to serve the needs of masses of young people, but in the long run, firms may look at countries such as Chile and Uruguay for ideas as to how the rest of Latin markets may evolve.
The processes of privatizations, market liberalization, and other structural reforms have changed the economic and business landscape of the region. A major transfer of public assets to the private sector has altered the industry structure in telecommunications, energy, banking, and other sectors analyzed in Chapters 3, 4, and 6. This major transfer was responsible for the major foreign direct investment inflows in the 1990s. Market reforms have opened widely most Latin American economies to the global economy through lowering of trade restrictions. These reform processes may have reached the end of their life cycle either because there is little left to privatize or because structural reforms are already in place. Another reason for the slowdown of reform drivers is increasing political and societal opposition, which questions whether these programs have had any impact at all on the welfare of Latin American society. Politicians may not have the resolve to continue on the path of more market reforms, due to the worsening of income distribution in the region and vulnerability of large masses of disenfranchised poor to economic contractions in the region.
Global financial drivers have also battered the fragile economies of Latin America in recent times. Take, for instance, the impact of global financial shocks. In less than a decade the region has adjusted to the financial shocks caused by the peso devaluation in Mexico in 1994, the Asian crisis in 1997, the Russian default in 1998, and most recently, the Brazilian Real devaluation of 1999. The international and Latin American financial sector has learned from these experiences and will not be caught by surprise by the next crisis. For example, most of the impact of Argentina's default and moratorium of her external debt at the end of 2001 has been localized to Argentina and to a lesser extent, to Brazil and Chile. Unlike the other global financial crises mentioned above, most Latin American countries have already adjusted their economies in anticipation of such an event through currency adjustments and monetary policies. Similarly, the international financial sector has already discounted Argentina by lowering the price of Argentinean floating-rate bonds to junk status, heavily discounting the futures exchange rate for the peso, and cutting further access to capital markets. As a result, Argentinean society will suffer the brunt of the adjustment.
One driver that has been put on hold is regional integration. After the fever of regional market integration in the early 1990s, this has been put on hold after the collapse of Mercosur progress and lack of interest in the discussion on the proposed Free-Trade Area of the Americas (FTAA). The recent approval of trade-promotion authority by the U.S. president may revitalize the initiative of expansion of NAFTA to other countries, but progress on FTAA will depend on the resolve of the United States and Brazil to address the major differences in reaching such a monumental agreement.
Technological transformation is the only driver that is still unfolding in the region. Internet penetration continues to grow at a fast pace. Wireless networks also continue to expand and gain more subscribers. Enterprise technology will continue to be adopted as firms invest in more enterprise integration technologies. In sum, we see a slowdown of the intensity of the main drivers on the region's economy and markets. As these drivers slow down, the region's economies will become less volatile.